Commentary

First Take

Germany can’t stave off euro-zone recession

FRANKFURT (MarketWatch) — Markets found something to cheer about after data Tuesday showed Germany managed to grow slightly more than expected in the second quarter while France avoided a downturn, but the figures won’t make easy beach reading for vacationing European policy makers.

“It shows just how dire things have become in the single currency area when the markets take comfort from figures that show the French and German economies are pretty much flat on their backs,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.

Reuters

German Chancellor Angela Merkel.

German gross domestic grew at a quarterly pace of 0.3% in the April-June period, outpacing forecasts for Europe’s largest economy to grow by 0.2%. France, the region’s No. 2 economy, posted a flat performance in the second quarter.

That wasn’t enough to keep overall euro-zone GDP from shrinking 0.2%, in line with forecasts, after a flat performance in the first three months of the year and a contraction in the final quarter of 2011. Without Germany, GDP would have shrunk at a 0.3% quarterly pace, according to Commerzbank.

The national numbers in the euro-zone periphery made for particularly grim reading. Spain (-0.4%), Italy (-0.7%), Cyprus (-0.8%) and Portugal (-1.2%) remain mired in recession. Belgium saw GDP shrink 0.6% after 1.2% quarterly growth in the first quarter.

How Greece's shrinking economy can still sell debt

(3:33)

Greece completed its largest debt sale in two years, ensuring that it will have the money to repay bonds held by the European Central Bank next week. Dow Jones's Costas Paris explains how a country which contracted by 6.2% can still hold a successful sale. Photo: Reuters

And Greek gross domestic product saw a 6.2%, non-seasonally adjusted, year-on-year contraction in the second quarter, the country’s statistics agency reported. That implies a quarterly contraction of around 1% after a 0.5% rebound in the first quarter, according to Barclays.

Overall, the data point to a scenario that sees even the core economies shrinking over the remainder of 2012, economists said.

Meanwhile, the summer lull that’s made for thin trading and relatively calm markets won’t last. The worsening economic outlook will likely force politicians and policy makers to come up with a plan to decisively bring down borrowing costs for otherwise too-big-to-bail Spain and Italy.

Berlin remains the linchpin.

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(4:16)

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A deepening recession will make it all the more difficult for peripheral countries to meet their deficit targets as they attempt to stick to a range of changes to labor rules and other painful measures aimed at boosting productivity. Germany, where Chancellor Angela Merkel has just returned from a vacation in South Tyrol, is already seeing renewed calls to use its fiscal breathing room to boost domestic demand, as well as to tolerate more inflation. See also: Solving inflation divide crucial step for euro.

It may also bolster European Central Bank President Mario Draghi in his battle with Germany’s Bundesbank as he works to build support for a plan that would see the ECB resume bond-buying in the secondary market if struggling countries tap the region’s rescue funds to buy bonds in the primary market.

Once again, euro-zone politics leave the summertime best sellers in the shade.

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